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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☒ | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2021
or
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☐ | Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from ____________ to _____________
Commission File Number: 001-38794
COVETRUS, INC.
(Exact Name of Registrant as Specified in its Charter)
| | | | | | | | |
Delaware | | 83-1448706 |
(State or other jurisdiction of incorporation) | | (I.R.S. Employer Identification No.) |
7 Custom House Street
Portland, ME 04101
Tel: (888) 280-2221
(Address, including Zip Code, and Telephone Number, including Area Code, of Registrant’s Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class | | Trading Symbol(s) | | Name of Each Exchange on Which Registered |
Common Stock, par value $0.01 per share | | CVET | | Nasdaq Global Select Market |
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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | Yes | ☒ | No | ☐ |
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Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). | Yes | ☒ | No | ☐ |
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. |
Large accelerated Filer | ☒ | | Accelerated Filer | ☐ |
Non-accelerated Filer | ☐ | | Smaller reporting company | ☐ |
| | | Emerging growth company | ☐ |
| | | | | | | | | | | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | ☐ |
| | | | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | Yes | ☐ | No | ☒ |
The registrant had 137,783,356 shares of common stock outstanding as of October 29, 2021.
TABLE OF CONTENTS
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Covetrus, Inc. 2021 Q3 Form 10-Q | 2 |
Glossary of Defined Terms and Abbreviations from our Form 10-K and Form 10-Q
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AAFCO | Association of American Feed Control Officials | | |
Acquisition* | Our acquisition of Vets First Choice in an all-stock transaction | | |
Adjusted EBITDA* | Adjusted EBITDA is the segment measure of profit or loss reported to the CODM. Adjusted EBITDA excludes share-based compensation, strategic consulting, transaction costs, formation of Covetrus expenses, separation programs and executive severance, carve-out operating expenses, certain IT infrastructure expenses necessary to establish ourselves as a newly public company, goodwill impairment charges, capital structure-related fees, operating lease right-of-use asset impairments, the proportionate share of the adjustments of consolidated and non-consolidated affiliates where Covetrus ownership is less than 100%, managed exits from businesses we are exiting or closing, and other income and expense items, net. Non-GAAP Adjusted EBITDA on a total segment basis is reconciled in Note 3 - Segment Data as required by ASC 280 | | |
AIP* | Annual Incentive Plan | | |
Investment and Shareholders Agreement* | The Investment and Shareholders Agreement of Distrivet, S.A. executed on January 13, 2020 | | |
Animal Health Business* | Former Parent's spun-off animal-health business | | |
Animal Owners* | Clients of our Customers | | |
APAC | Asia Pacific | | |
AppointMaster* | AppointMaster, LLC | | |
APVMA | Australian Pesticides and Veterinary Medicines Authority | | |
ASC | Accounting Standards Codification | | |
ASU | Accounting Standards Update | | |
B/(W) | Better/(Worse) | | |
BEAT | Base Erosion & Anti-Abuse Tax | | |
CEO | Chief Executive Officer | | |
CARES | Coronavirus Aid, Relief, and Economic Security Act | | |
CCPA | California Consumer Privacy Act | | |
CFO | Chief Financial Officer | | |
CODM | Chief Operating Decision Maker | | |
COVID-19 | Novel Coronavirus Disease 2019 | | |
Credit Facilities* | On February 7, 2019, we entered into a $1.5 billion syndicated credit agreement with a group of lenders for a five-year term | | |
Customers* | Veterinarians and animal-health practitioners | | |
CVM | Center for Veterinary Medicine | | |
DEA | U.S. Drug Enforcement Administration | | |
DGCL | Delaware General Corporation Law | | |
Defendants* | The Company, our Former Parent, our former Chief Executive Officer and President, and our former Chief Financial Officer, collectively | | |
Distribution* | All the shares of our common stock that were then owned by our Former Parent were distributed to its stockholders of record as of January 17, 2019. Concurrent with the Distribution, we paid a cash dividend of $1.2 billion to our Former Parent from loan proceeds from our newly established Term Loan Facility | | |
Distrivet* | On April 30, 2020, we combined our subsidiary, SAHS, with Distrivet, S.A. to form a leading animal-health provider on the Iberian Peninsula. We own 50.01% of the company, called Distrivet, a Covetrus company | | |
EBITDA | Earnings Before Interest, Taxes, Depreciation, and Amortization | | |
EFTA | European Free Trade Area | | |
EFSA | European Food Safety Authority | | |
EMA | European Medicines Agency | | |
EPA | Environmental Protection Agency | | |
EPS | Basic earnings (loss) per common share | | |
ESG | Environmental, social, and corporate governance | | |
ESPP | Employee Stock Purchase Plan | | |
Exchange Act | Securities Exchange Act of 1934, as amended | | |
FCMA | Fellow Chartered Management Accountant | | |
FDA | U.S. Food and Drug Administration | | |
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Covetrus, Inc. 2021 Q3 Form 10-Q | 3 |
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FDII | Foreign-derived Intangible Income | | |
Form 10-K | Audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2020 | | |
Form 10-Q or Report | Quarterly Report on Form 10-Q | | |
Former Parent* | Henry Schein, Inc. | | |
FTC | Federal Trade Commission | | |
GAAP | Generally Accepted Accounting Principles in the United States of America | | |
GDPR | EU General Data Protection Regulation | | |
GFI | Guidance for Industry | | |
GILTI | Global Intangible Low-Taxed Income | | |
Global Technology Solutions or GTS* | The aggregation of our software services with our prescription management platform and related pharmacy services | | |
IRS | Internal Revenue Service | | |
ITGC | Information Technology General Controls | | |
LIBOR | London Interbank Offered Rate | | |
NM | Not Meaningful | | |
NYSE | New York Stock Exchange | | |
NZ EPA | New Zealand Environmental Protection Authority | | |
OSHA | Department of Labor’s Occupational Safety and Health Administration | | |
PSU | Performance Stock Unit | | |
Revolving Credit Facility* | $300 million revolving line of credit for working capital and general corporate purposes | | |
RSA | Restricted Stock Award | | |
RSU | Restricted Stock Unit | | |
SAHS* | Spain Animal Health Solutions S.L.U. | | |
scil | scil animal-care business | | |
SEC | Securities and Exchange Commission | | |
Separation* | In anticipation of the spin-off, affiliates of Covetrus purchased from certain minority holders their ownership interests in the applicable operating companies of the Animal Health Business. On February 7, 2019, our Former Parent completed the spin-off of its Animal Health Business and transferred the applicable assets, liabilities, and ownership interests to us | | |
Series A Preferred Shares* | 7.50% Series A Convertible Preferred Stock | | |
SG&A | Selling, general and administrative expenses | | |
Share Sale* | On February 7, 2019 and prior to the Distribution, we sold $361 million in shares to accredited institutional investors. The proceeds from the Share Sale were paid to us and distributed to our Former Parent | | |
SMB | Small or Medium-Sized Business | | |
Term Loan Facility* | $1.2 billion term loan facility | | |
Transactions* | Collectively the following events, effective February 7, 2019, Vets First Choice became a wholly-owned subsidiary of Covetrus, Inc. (f/k/a HS Spinco, Inc.), a company formed by our Former Parent in connection with the spin-off of the Animal Health Business and combination with Vets First Choice | | |
TSA | Transition Service Agreements | | |
U.K. | United Kingdom | | |
USD | U.S. Dollar | | |
USDA | U.S. Department of Agriculture | | |
VCP* | Veterinary Care Plans | | |
Vets First Choice* | Direct Vet Marketing, Inc. (d/b/a Vets First Choice) | | |
VMD | Veterinary Medicines Directorate | | |
VSG* | Veterinary Study Groups, Inc. | | |
Covetrus, Company, we, us, our, or ourselves | Covetrus, Inc. and its consolidated subsidiaries, collectively | | |
XBRL | eXtensible Business Reporting Language | | |
*Defined term or abbreviation is specific to Covetrus | | |
| | | | | |
Covetrus, Inc. 2021 Q3 Form 10-Q | 4 |
PART I
Item 1. Condensed Consolidated Financial Statements
COVETRUS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share amounts)
| | | | | | | | | | | |
| September 30, 2021 | | December 31, 2020 |
| (Unaudited) | | |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 187 | | | $ | 290 | |
Accounts receivable, net of allowance of $4 and $5 | 491 | | | 507 | |
Inventories, net | 552 | | | 530 | |
Other receivables | 77 | | | 67 | |
Prepaid expenses and other | 44 | | | 26 | |
Total current assets | 1,351 | | | 1,420 | |
Non-current assets: | | | |
Property and equipment, net of accumulated depreciation of $125 and $106 | 127 | | | 116 | |
Operating lease right-of-use assets, net | 120 | | | 117 | |
Goodwill | 1,247 | | | 1,187 | |
Other intangibles, net of accumulated amortization of $562 and $470 | 479 | | | 555 | |
Investments and other | 96 | | | 101 | |
Total assets | $ | 3,420 | | | $ | 3,496 | |
LIABILITIES, MEZZANINE EQUITY, AND SHAREHOLDERS' EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 428 | | | $ | 411 | |
Current maturities of long-term debt and other borrowings | 46 | | | 1 | |
Accrued payroll and related liabilities | 62 | | | 67 | |
Accrued taxes | 37 | | | 37 | |
Other current liabilities | 141 | | | 175 | |
Total current liabilities | 714 | | | 691 | |
Non-current liabilities: | | | |
Long-term debt and other borrowings, net | 1,027 | | | 1,068 | |
Deferred income taxes | 18 | | | 28 | |
Other liabilities | 136 | | | 136 | |
Total liabilities | 1,895 | | | 1,923 | |
Commitments and contingencies (Note 6) | | | |
Mezzanine equity: | | | |
Redeemable non-controlling interests (Note 11) | 23 | | | 36 | |
Shareholders' equity: | | | |
Common stock, $0.01 par value per share, 675,000,000 shares authorized; 137,731,865 shares issued and outstanding as of September 30, 2021; 136,017,964 shares issued and outstanding as of December 31, 2020 | 1 | | | 1 | |
Accumulated other comprehensive loss (Note 10) | (80) | | | (66) | |
Additional paid-in capital | 2,659 | | | 2,629 | |
Accumulated deficit | (1,078) | | | (1,027) | |
Total shareholders’ equity | 1,502 | | | 1,537 | |
Total liabilities, mezzanine equity, and shareholders’ equity | $ | 3,420 | | | $ | 3,496 | |
See notes to unaudited condensed consolidated financial statements.
| | | | | |
Covetrus, Inc. 2021 Q3 Form 10-Q | 5 |
COVETRUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts) (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Net sales (Note 4) | $ | 1,162 | | | $ | 1,126 | | | $ | 3,453 | | | $ | 3,217 | |
Cost of sales | 946 | | | 929 | | | 2,807 | | | 2,625 | |
Gross profit | 216 | | | 197 | | | 646 | | | 592 | |
Operating expenses: | | | | | | | |
Selling, general and administrative | 220 | | | 224 | | | 662 | | | 642 | |
| | | | | | | |
| | | | | | | |
Operating income (loss) | (4) | | | (27) | | | (16) | | | (50) | |
Other income (expense): | | | | | | | |
Interest expense, net | (8) | | | (10) | | | (26) | | | (37) | |
| | | | | | | |
| | | | | | | |
Other, net | (2) | | | 5 | | | (2) | | | 79 | |
Income (loss) before taxes | (14) | | | (32) | | | (44) | | | (8) | |
Income tax benefit (expense) (Note 7) | 10 | | | (3) | | | (7) | | | (6) | |
| | | | | | | |
Net income (loss) | (4) | | | (35) | | | (51) | | | (14) | |
Net (income) loss attributable to redeemable non-controlling interests | — | | | — | | | — | | | (1) | |
Net income (loss) attributable to Covetrus | $ | (4) | | | $ | (35) | | | $ | (51) | | | $ | (15) | |
| | | | | | | |
Earnings (loss) per share: (Note 5) | | | | | | | |
Basic | $ | (0.03) | | | $ | (0.33) | | | $ | (0.37) | | | $ | (0.18) | |
Diluted | $ | (0.03) | | | $ | (0.33) | | | $ | (0.37) | | | $ | (0.18) | |
Weighted-average common shares outstanding: | | | | | | | |
Basic | 137 | | 116 | | 138 | | 113 |
Diluted | 137 | | 116 | | 138 | | 113 |
See notes to unaudited condensed consolidated financial statements.
| | | | | |
Covetrus, Inc. 2021 Q3 Form 10-Q | 6 |
COVETRUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions) (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Net income (loss) | $ | (4) | | | $ | (35) | | | $ | (51) | | | $ | (14) | |
Other comprehensive income (loss), net of tax: | | | | | | | |
Foreign currency translation gain (loss) | (13) | | | 14 | | | (17) | | | (2) | |
| | | | | | | |
Gain (loss) on derivative instruments | (1) | | | (1) | | | 3 | | | (8) | |
| | | | | | | |
Total other comprehensive income (loss) | (14) | | | 13 | | | (14) | | | (10) | |
Comprehensive income (loss) | (18) | | | (22) | | | (65) | | | (24) | |
Comprehensive (income) loss attributable to redeemable non-controlling interests: | | | | | | | |
Net (income) loss | — | | | — | | | — | | | (1) | |
Foreign currency translation (gain) loss | — | | | — | | | — | | | (2) | |
Comprehensive (income) loss attributable to redeemable non-controlling interests | — | | | — | | | — | | | (3) | |
Comprehensive income (loss) attributable to Covetrus | $ | (18) | | | $ | (22) | | | $ | (65) | | | $ | (27) | |
See notes to unaudited condensed consolidated financial statements.
| | | | | |
Covetrus, Inc. 2021 Q3 Form 10-Q | 7 |
COVETRUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In millions, except share amounts) (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2021 |
| | Common Stock | | Accumulated Other Comprehensive Income (Loss) | | Additional Paid-in Capital | | Accumulated Deficit | | Total Shareholders' Equity |
| | Shares | | Amount | |
Balance at June 30, 2021 | | 137,359,704 | | | $ | 1 | | | $ | (66) | | | $ | 2,641 | | | $ | (1,074) | | | $ | 1,502 | |
Net income (loss) attributable to Covetrus | | — | | | — | | | — | | | — | | | (4) | | | (4) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Issuance of shares in connection with acquisitions | | 146,633 | | | — | | | — | | | 4 | | | — | | | 4 | |
| | | | | | | | | | | | |
Issuance of shares in connection with share-based compensation plans, net of shares withheld for taxes | | 225,528 | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | |
Share-based compensation | | — | | | — | | | — | | | 14 | | | — | | | 14 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Other comprehensive income (loss) | | — | | | — | | | (14) | | | — | | | — | | | (14) | |
Balance at September 30, 2021 | | 137,731,865 | | | $ | 1 | | | $ | (80) | | | $ | 2,659 | | | $ | (1,078) | | | $ | 1,502 | |
| | | | | | | | | | | | |
| | Nine Months Ended September 30, 2021 |
| | Common Stock | | Accumulated Other Comprehensive Income (Loss) | | Additional Paid-in Capital | | Accumulated Deficit | | Total Shareholders' Equity |
| | Shares | | Amount | |
Balance at December 31, 2020 | | 136,017,964 | | | $ | 1 | | | $ | (66) | | | $ | 2,629 | | | $ | (1,027) | | | $ | 1,537 | |
Net income (loss) attributable to Covetrus | | — | | | — | | | — | | | — | | | (51) | | | (51) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Issuance of shares in connection with acquisitions | | 146,633 | | | — | | | — | | | 4 | | | — | | | 4 | |
| | | | | | | | | | | | |
Issuance of shares in connection with share-based compensation plans, net of shares withheld for taxes | | 1,567,268 | | | — | | | — | | | (11) | | | — | | | (11) | |
Redeemable non-controlling interest redemption value adjustment | | — | | | — | | | — | | | (2) | | | — | | | (2) | |
Share-based compensation | | — | | | — | | | — | | | 39 | | | — | | | 39 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Other comprehensive income (loss) | | — | | | — | | | (14) | | | — | | | — | | | (14) | |
Balance at September 30, 2021 | | 137,731,865 | | | $ | 1 | | | $ | (80) | | | $ | 2,659 | | | $ | (1,078) | | | $ | 1,502 | |
See notes to unaudited condensed consolidated financial statements.
| | | | | |
Covetrus, Inc. 2021 Q3 Form 10-Q | 8 |
COVETRUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
(In millions, except share amounts) (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2020 |
| | Common Stock | | Accumulated Other Comprehensive Income (Loss) | | Additional Paid-in Capital | | Accumulated Deficit | | | | Total Shareholders' Equity |
| | Shares | | Amount | |
Balance at June 30, 2020 | | 112,674,657 | | | $ | 1 | | | $ | (107) | | | $ | 2,362 | | | $ | (983) | | | | | $ | 1,273 | |
Net income (loss) attributable to Covetrus | | — | | | — | | | — | | | — | | | (35) | | | | | (35) | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Redeemable non-controlling interest redemption value adjustment | | — | | | — | | | — | | | (6) | | | — | | | | | (6) | |
| | | | | | | | | | | | | | |
Issuance of shares in connection with share-based compensation plans, net of shares withheld for taxes | | 331,297 | | | — | | | — | | | 2 | | | — | | | | | 2 | |
Share-based compensation | | — | | | — | | | — | | | 11 | | | — | | | | | 11 | |
| | | | | | | | | | | | | | |
Series A preferred stock cash dividend | | — | | | — | | | — | | | — | | | (4) | | | | | (4) | |
Conversion of Series A preferred stock | | 14,357,478 | | | — | | | — | | | 156 | | | — | | | | | 156 | |
Other comprehensive income (loss) | | — | | | — | | | 16 | | | — | | | — | | | | | 16 | |
| | | | | | | | | | | | | | |
Balance at September 30, 2020 | | 127,363,432 | | | $ | 1 | | | $ | (91) | | | $ | 2,525 | | | $ | (1,022) | | | | | $ | 1,413 | |
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2020 |
| | Common Stock | | Accumulated Other Comprehensive Income (Loss) | | Additional Paid-in Capital | | Accumulated Deficit | | | | Total Shareholders' Equity |
| | Shares | | Amount | |
Balance at December 31, 2019 | | 111,620,507 | | | $ | 1 | | | $ | (86) | | | $ | 2,339 | | | $ | (1,001) | | | | | $ | 1,253 | |
Net income (loss) attributable to Covetrus | | — | | | — | | | — | | | — | | | (15) | | | | | (15) | |
Redeemable non-controlling interest redemption value adjustment | | — | | | — | | | — | | | (6) | | | — | | | | | (6) | |
Issuance of shares in connection with share-based compensation plans, net of shares withheld for taxes | | 1,385,447 | | | — | | | — | | | 6 | | | — | | | | | 6 | |
Share-based compensation | | — | | | — | | | — | | | 30 | | | — | | | | | 30 | |
Series A preferred stock cash dividend | | — | | | — | | | — | | | — | | | (6) | | | | | (6) | |
Conversion of Series A preferred stock | | 14,357,478 | | | — | | | — | | | 156 | | | — | | | | | 156 | |
Other comprehensive income (loss) | | — | | | — | | | (5) | | | — | | | — | | | | | (5) | |
| | | | | | | | | | | | | | |
Balance at September 30, 2020 | | 127,363,432 | | | $ | 1 | | | $ | (91) | | | $ | 2,525 | | | $ | (1,022) | | | | | $ | 1,413 | |
See notes to unaudited condensed consolidated financial statements.
| | | | | |
Covetrus, Inc. 2021 Q3 Form 10-Q | 9 |
COVETRUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions) (Unaudited)
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2021 | | 2020 |
Cash flows from operating activities: | | | |
Net income (loss) | $ | (51) | | | $ | (14) | |
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: | | | |
Depreciation and amortization | 128 | | | 124 | |
Amortization of right-of-use assets | 21 | | | 18 | |
| | | |
Operating lease right-of-use asset impairment | — | | | 8 | |
| | | |
Gain on divestiture of a business | — | | | (72) | |
Share-based compensation expense | 39 | | | 30 | |
| | | |
Benefit for deferred income taxes | (16) | | | (7) | |
| | | |
| | | |
| | | |
Amortization of debt issuance costs | 4 | | | 4 | |
Loss on managed exit of a business | — | | | 8 | |
Other | 4 | | | 1 | |
Changes in operating assets and liabilities, net of acquisitions: | | | |
Accounts receivable, net | 6 | | | (77) | |
Inventories, net | (33) | | | 99 | |
Other assets and liabilities | (58) | | | (48) | |
Accounts payable and accrued expenses | 14 | | | (63) | |
Net cash provided by (used for) operating activities | 58 | | | 11 | |
Cash flows from investing activities: | | | |
Purchases of property and equipment | (38) | | | (40) | |
Payments related to equity investments and business acquisitions, net of cash acquired | (81) | | | (13) | |
Proceeds from divestiture of a business, net | — | | | 104 | |
Proceeds from sale of property and equipment | — | | | 4 | |
Net cash provided by (used for) investing activities | (119) | | | 55 | |
Cash flows from financing activities: | | | |
Proceeds from revolving credit facility | — | | | 190 | |
Repayment of revolving credit facility | — | | | (190) | |
| | | |
Principal payments of debt | — | | | (62) | |
Debt issuance and amendment costs | — | | | (5) | |
| | | |
| | | |
Proceeds from share-based awards | 4 | | | 7 | |
| | | |
Tax payments related to share-based awards | (15) | | | (1) | |
| | | |
| | | |
Proceeds from issuance of Series A preferred stock | — | | | 250 | |
Series A preferred stock issuance costs | — | | | (6) | |
Series A preferred stock dividend | — | | | (6) | |
Distributions to non-controlling shareholders | (2) | | | — | |
Deferred payments related to equity investments and business acquisitions | (13) | | | (17) | |
Payments related to the buy-out of non-controlling interests in subsidiaries of Covetrus | (11) | | | — | |
Net cash provided by (used for) financing activities | (37) | | | 160 | |
Effect of exchange rate changes on cash and cash equivalents | (5) | | | (1) | |
Net change in cash and cash equivalents | (103) | | | 225 | |
Cash and cash equivalents, beginning of period | 290 | | | 130 | |
Cash and cash equivalents, end of period | $ | 187 | | | $ | 355 | |
| | | |
Supplemental disclosures of non-cash investing and financing activities: | | | |
Conversion of Series A preferred stock | $ | — | | | $ | 156 | |
Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 26 | | | $ | 60 | |
| | | |
Deconsolidation of a subsidiary | $ | — | | | $ | 15 | |
Common stock issued in business acquisition | $ | 4 | | | $ | — | |
See notes to unaudited condensed consolidated financial statements. | | | | | |
Covetrus, Inc. 2021 Q3 Form 10-Q | 10 |
COVETRUS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions) (Unaudited)
1. BUSINESS OVERVIEW AND SIGNIFICANT ACCOUNTING POLICIES
Business
We are a global animal-health technology and services company dedicated to supporting the companion, equine, and large-animal veterinary markets.
Basis of Presentation and Principles of Consolidation
The accompanying balance sheet as of December 31, 2020, which was derived from audited financial statements, and the unaudited condensed consolidated financial statements as of and for the three and nine months ended September 30, 2021, have been prepared in accordance with applicable rules and regulations of the SEC for interim financial reporting. Pursuant to those rules and regulations, we omitted certain information and disclosures normally included in annual financial statements prepared in accordance with GAAP.
In our opinion, the accompanying unaudited condensed consolidated financial statements reflect all recurring adjustments and transactions necessary for a fair statement of our financial position, results of operations, and cash flows for the interim periods presented. Such operating results are not necessarily indicative of annual or future results. These unaudited condensed consolidated financial statements and notes should be read in conjunction with the Form 10-K filed with the SEC on March 1, 2021.
The accompanying unaudited condensed consolidated financial statements include the operations of the Company, as well as those of our wholly-owned and majority-owned subsidiaries from their respective dates of inception or acquisition. All significant intercompany transactions and balances were eliminated in consolidation. Investments in unconsolidated affiliates, which are 20% to 50.01% owned, or investments of less than 20% in which we could influence the operating or financial decisions, are accounted for under the equity method.
Certain prior period amounts were reclassified or rounded to conform to the presentation of the current period.
Accounting Pronouncements
•As of January 1, 2021, we adopted ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” which removes specific technical exceptions to general principles found in Topic 740, items that often produce information that investors have difficulty understanding, and simplifies the accounting for income taxes. The adoption of this ASU did not have a material impact on the results of our condensed consolidated financial statements.
•ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting for contracts, hedging relationships, and other transactions that reference LIBOR. The standard is currently effective and upon adoption may be applied prospectively to contract modifications made on or before December 31, 2022. Our debt agreements that utilize LIBOR have not yet discontinued the use of LIBOR and, therefore, this ASU is not yet effective for us. The banking syndicate associated with our Credit Facilities intends to cease using the 1-week and 2-month USD LIBOR at the end of 2021, with the other USD Tenors to cease June 30, 2023. We will continue to monitor, and, to the extent our Credit Facilities require amendment to reflect a replacement rate prior to December 31, 2022, we will evaluate the benefits of adopting this ASU.
| | | | | |
Covetrus, Inc. 2021 Q3 Form 10-Q | 11 |
COVETRUS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions) (Unaudited)
2. BUSINESS ACQUISITIONS
During the three and nine months ended September 30, 2021, we completed acquisitions of VCP, a leading platform in veterinary wellness plan administration, and AppointMaster, a provider of integrated communications solutions for veterinary practices, for an aggregate purchase price of $85 million. These acquisitions are intended to provide our Customers with new tools to foster stronger relationships with their Animal Owner clients by delivering better business and healthcare outcomes. The allocation of the aggregate purchase price resulted in goodwill of $60 million and other intangible assets, including technology, of $31 million. The results of operations have been included in our North American segment since the acquisition dates. All acquisition expenses incurred were not material. The transactions are not material business combinations or material to our condensed consolidated financial statements individually or in the aggregate.
3. SEGMENT DATA
The following tables reflect our segment and corporate information and reconciles non-GAAP Adjusted EBITDA for reportable segments to consolidated Net income (loss) attributable to Covetrus:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2021 |
| | North America | | Europe | | APAC & Emerging Markets | | Corporate | | Eliminations | | Total |
Net sales | | $ | 697 | | | $ | 353 | | | $ | 116 | | | $ | — | | | $ | (4) | | | $ | 1,162 | |
Adjusted EBITDA | | $ | 55 | | | $ | 16 | | | $ | 10 | | | $ | (23) | | | $ | — | | | $ | 58 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Reconciliation of Net income (loss) attributable to Covetrus to Non-GAAP Adjusted EBITDA: | | |
Net income (loss) attributable to Covetrus | | | | | | $ | (4) | |
Plus: Depreciation and amortization | | | | | | 42 | |
Plus: Interest expense, net | | | | | | 8 | |
Plus: Income tax (benefit) expense | | | | | | (10) | |
Earnings (loss) before interest, taxes, depreciation, and amortization | | | | | | 36 | |
Plus: Share-based compensation | | | | | | 14 | |
Plus: Strategic consulting (a) | | | | | | 2 | |
Plus: Transaction costs (b) | | | | | | 1 | |
Plus: Separation programs and executive severance | | | | | | 3 | |
| | | | | | |
| | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | |
Plus: Equity method investment and non-consolidated affiliates (c) | | | | | | 1 | |
| | | | | | |
| | | | | | |
| | | | | | |
Plus: Other items, net | | | | | | 1 | |
| | | | | | |
Non-GAAP Adjusted EBITDA | | | | | | $ | 58 | |
|
|
(a) Includes third-party consulting services |
(b) Includes legal, accounting, tax, and other professional fees incurred in connection with acquisitions and divestitures |
(c) Includes the proportionate share of the adjustments to EBITDA of consolidated and non-consolidated affiliates where Covetrus ownership is less than 100% |
|
|
| | | | | |
Covetrus, Inc. 2021 Q3 Form 10-Q | 12 |
COVETRUS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions) (Unaudited)
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| | Three Months Ended September 30, 2020 |
| | North America | | Europe | | APAC & Emerging Markets | | Corporate | | Eliminations | | Total |
Net sales | | $ | 618 | | | $ | 403 | | | $ | 108 | | | $ | — | | | $ | (3) | | | $ | 1,126 | |
Adjusted EBITDA | | $ | 45 | | | $ | 19 | | | $ | 8 | | | $ | (13) | | | $ | — | | | $ | 59 | |
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Reconciliation of Net income (loss) attributable to Covetrus to Non-GAAP Adjusted EBITDA: | | |
Net income (loss) attributable to Covetrus | | | | | | | | $ | (35) | |
Plus: Depreciation and amortization | | | | | | 41 | |
Plus: Interest expense, net | | | | | | 10 | |
Plus: Income tax (benefit) expense | | | | | | 3 | |
Earnings (loss) before interest, taxes, depreciation, and amortization | | | | | | 19 | |
Plus: Share-based compensation | | | | | | 11 | |
Plus: Strategic consulting (a) | | | | | | 3 | |
Plus: Transaction costs (b) | | | | | | 1 | |
Plus: Formation of Covetrus (c) | | | | | | 4 | |
Plus: Separation programs and executive severance | | | | | | 2 | |
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Plus: IT infrastructure | | | | | | 1 | |
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Plus: Equity method investment and non-consolidated affiliates (d) | | | | | | 1 | |
Plus: Operating lease right-of-use asset impairment | | | | | | 8 | |
Plus: France managed exit (e) | | | | | | 8 | |
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Plus: Other items, net | | | | | | 1 | |
Non-GAAP Adjusted EBITDA | | | | | | $ | 59 | |
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(a) Includes third-party consulting services |
(b) Includes legal, accounting, tax, and other professional fees incurred in connection with acquisitions and divestitures |
(c) Includes professional and consulting fees, duplicative costs associated with transition service agreements, and other costs incurred in connection with the separation from Former Parent and establishing Covetrus as an independent public company |
(d) Includes the proportionate share of the adjustments to EBITDA of consolidated and non-consolidated affiliates where Covetrus ownership is less than 100% |
(e) Includes $7 million of severance costs and $1 million of other costs |
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Covetrus, Inc. 2021 Q3 Form 10-Q | 13 |
COVETRUS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions) (Unaudited)
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| | Nine Months Ended September 30, 2021 |
| | North America | | Europe | | APAC & Emerging Markets | | Corporate | | Eliminations | | Total |
Net sales | | $ | 2,045 | | | $ | 1,080 | | | $ | 342 | | | $ | — | | | $ | (14) | | | $ | 3,453 | |
Adjusted EBITDA | | $ | 166 | | | $ | 57 | | | $ | 29 | | | $ | (71) | | | $ | — | | | $ | 181 | |
| | | | | | | | | | | | |
Reconciliation of Net income (loss) attributable to Covetrus to Non-GAAP Adjusted EBITDA: | | |
Net income (loss) attributable to Covetrus | | | | | | $ | (51) | |
Plus: Depreciation and amortization | | | | | | 128 | |
Plus: Interest expense, net | | | | | | 26 | |
Plus: Income tax (benefit) expense | | | | | | 7 | |
Earnings (loss) before interest, taxes, depreciation, and amortization | | | | | | 110 | |
Plus: Share-based compensation | | | | | | 39 | |
Plus: Strategic consulting (a) | | | | | | 16 | |
Plus: Transaction costs (b) | | | | | | 3 | |
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Plus: Formation of Covetrus (c) | | | | | | 2 | |
Plus: Separation programs and executive severance | | | | | | 5 | |
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Plus: Equity method investments and non-consolidated affiliates (d) | | | | | | 2 | |
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Plus: Other items, net | | | | | | 4 | |
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Non-GAAP Adjusted EBITDA | | | | | | $ | 181 | |
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(a) Related to third-party consulting services. Included within this line item are variable performance fees earned for services rendered under a third-party consulting agreement. This agreement was amended in April 2021 and, in connection with such amendment, the services were completed and fees were fully accrued for as of June 30, 2021 |
(b) Includes legal, accounting, tax, and other professional fees incurred in connection with acquisitions and divestitures |
(c) Includes professional and consulting fees, and other costs incurred in connection with the separation from Former Parent and establishing Covetrus as an independent public company |
(d) Includes the proportionate share of the adjustments to EBITDA of consolidated and non-consolidated affiliates where Covetrus ownership is less than 100% |
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Covetrus, Inc. 2021 Q3 Form 10-Q | 14 |
COVETRUS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions) (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2020 |
| | North America | | Europe | | APAC & Emerging Markets | | Corporate | | Eliminations | | Total |
Net sales | | $ | 1,771 | | | $ | 1,166 | | | $ | 288 | | | $ | — | | | $ | (8) | | | $ | 3,217 | |
Adjusted EBITDA | | $ | 141 | | | $ | 53 | | | $ | 20 | | | $ | (44) | | | $ | — | | | $ | 170 | |
| | | | | | | | | | | | |
Reconciliation of Net income (loss) attributable to Covetrus to Non-GAAP Adjusted EBITDA: | | |
Net income (loss) attributable to Covetrus | | | | | | $ | (15) | |
Plus: Depreciation and amortization | | | | | | 124 | |
Plus: Interest expense, net | | | | | | 37 | |
Plus: Income tax (benefit) expense | | | | | | 6 | |
Earnings (loss) before interest, taxes, depreciation, and amortization | | | | | | 152 | |
Plus: Share-based compensation | | | | | | 30 | |
Plus: Strategic consulting (a) | | | | | | 13 | |
Plus: Transaction costs (b) | | | | | | 8 | |
Plus: Formation of Covetrus (c) | | | | | | 17 | |
Plus: Separation programs and executive severance | | | | | | 4 | |
| | | | | | | | | | | | |
Plus: IT infrastructure | | | | | | 3 | |
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Plus: Equity method investment and non-consolidated affiliates (d) | | | | | | 1 | |
Plus: Operating lease right-of-use asset impairment | | | | | | 8 | |
Plus: France managed exit (e) | | | | | | 8 | |
Plus: Capital structure | | | | | | 2 | |
Less: Other items, net (f) | | | | | | (76) | |
Non-GAAP Adjusted EBITDA | | | | | | $ | 170 | |
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(a) Includes third-party consulting services |
(b) Includes legal, accounting, tax, and other professional fees incurred in connection with acquisitions and divestitures |
(c) Includes professional and consulting fees, duplicative costs associated with transition service agreements, and other costs incurred in connection with the separation from Former Parent and establishing Covetrus as an independent public company |
(d) Includes the proportionate share of the adjustments to EBITDA of consolidated and non-consolidated affiliates where Covetrus ownership is less than 100% |
(e) Includes $7 million of severance costs and $1 million of other costs |
(f) Includes a $72 million gain on the divestiture of scil and a $1 million gain on the deconsolidation of SAHS |
See Note 4 - Revenue from Contracts with Customers for our revenue disaggregated by major product category and reportable segment.
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Covetrus, Inc. 2021 Q3 Form 10-Q | 15 |
COVETRUS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions) (Unaudited)
4. REVENUE FROM CONTRACTS WITH CUSTOMERS
Disaggregation of Revenue
The tables below present our revenue disaggregated by major product category and reportable segment.
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| | Three Months Ended September 30, 2021 |
| | Supply Chain Services | | Software Services | | Prescription Management | | Eliminations | | Total |
North America | | $ | 570 | | | $ | 20 | | | $ | 129 | | | $ | (22) | | | $ | 697 | |
Europe | | 354 | | | 3 | | | — | | | (4) | | | 353 | |
APAC & Emerging Markets | | 114 | | | 2 | | | — | | | — | | | 116 | |
Eliminations | | (4) | | | — | | | — | | | — | | | (4) | |
Total Net sales | | $ | 1,034 | | | $ | 25 | | | $ | 129 | | | $ | (26) | | | $ | 1,162 | |
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| | Three Months Ended September 30, 2020 |
| | Supply Chain Services | | Software Services | | Prescription Management | | Eliminations | | Total |
North America | | $ | 512 | | | $ | |